Investment in deepwater oil and gas exploration projects: A multi-factor analysis with a real options model

【Abstract】 Deepwater oil and gas projects embody high risks from geologic and engineering aspects, which exert substantial influence on project valuation. But the uncertainties may be converted to additional value to the projects in the case of flexible management. Given the flexibility of project management, this article extends the classical real options model to a multi-factor model which contains oil price, geologic and engineering uncertainties. It then gives an application example of the new model to evaluate deepwater oil and gas projects with numerical analytical method. Compared with other methods and models, this multi-factor real options model comprises more project information. It reflects the potential value deriving not only from oil price violation but also from geologic and engineering uncertainties, which provides more accurate and reliable valuation information for decision makers.